Tuesday 26 October 2010

Media cheer "unexpectedly strong growth in the 3rd quarter"

The media are all over the unexpectedly-good Q3 UK GDP growth story, hailing the boost to the value of Sterling on foreign exchange markets, against the Dollar and Euro.

However, the last thing our government wants is a stronger Pound. No, they are pinning their hopes on a private sector export-led recovery, like every other country. Improving exports is diametrically opposed to having a stronger currency -- that's only a good thing when you want to IMPORT more stuff, as in the previous decade (and look where that has taken us...). Ask China, Japan, Germany, Brazil, or any other country whose economy is export-driven, they will tell you that a strengthening currency strangles their economies. That is why the talk is of competitive currency wars lately; everyone wants to have a weaker currency, so they can sell stuff to everybody else.

So... what's going to give? Will we have nominal economic growth going forward, or will we have a strong Pound going forward. It's pretty unlikely we'll have both.

On the bright side, it's a positive to see the UK's credit rating upgraded to AAA with a stable outlook, from AAA with a negative outlook.

Friday 22 October 2010

Banks and corporations: the bigger they appear, the harder they'll fall

Debt is the problem. Debt is going to destroy anyone and anything that is in its path -- so you'd better try to get out of the way as fast as you can! Given than all of the world's national currencies are debt-based, this has some serious implications that are set to affect every one of us.

I was just reading a post from Mish (here) discussing the nonsensical notion there is a wall of cash "on the sidelines, waiting to enter the stock market". It's an interesting read in it's entirety and I recommend it to you.

However, I thought something in the article was of particular interest and perhaps would make the picture a lot clearer for people, so I figured I should post it up for you to see it. It's an interactive tool for analysing how much cash and debt is being held by the top 50 US corporations. If you are not already quite clear on how bad the debt problems (private as well as public) are, then I think it is worth you taking a couple of minutes to look at this information below.

Once this tool has loaded, simply hover your mouse over the bar (not the title text) for, say, Bank of America, JP Morgan Chase, or Ford Motor. Take a look at the numbers that pop up -- I think you might be more than a little surprised at what they tell you about the health of these purportedly healthy and powerful corporations. It should tell you all you need to know about the precarious state of the global economy in general, engorged on wholely unpayable debts that continue to get only worse as time passes. Something has to happen to change this, either some radical change of path that is nowhere visible on the horizon so far, or something violently goes BANG sometime and very likely sinks the whole global economy with it, in a massive chain reaction of broken promises and debt defaults. Who is looking after your "money" at the moment? Are they going to give it back to you when you need it? Will it still be worth anything?

Thursday 21 October 2010

Still debasing our coins even now!

First I am going to provide a little potted history of British coinage, since most people have no idea of this track record and it is instructive and I think you will agree worth your five minutes to suck it up. If you wish to skip this back story and head straight to the meat of what is new for you, skip down BELOW.

Back in the day, that is up until 1919, our "small change" coins in the UK were made from Sterling silver -- 92.5% silver with 7.5% copper to make then tougher, so they last longer in circulation than pure silver. This was when money was still a real, tangible store of value, rather than just medium of exchange tokens; worth whatever the politicians wanted to make them worth, as is the case today.

A quick background for the uninitiated to pre-decimal money in the UK, a shilling was the equivalent of today's 5p, and in fact during the 1970's these two different coins from the decimal and pre-decimal systems were interchangable with each other at this official rate of exchange. A florin (two shillings) was interchangable with a 10p coin, and so on through the various denominations which were all proportionate multiples/fractions of the standard weight of a shilling. An old-school Pound (a gold sovereign coin) was equivalent to 20 shillings.

If you were to take a quick look on eBay you will readily find plenty of people buying and selling "pre 1920" silver coins, trading with each other for the silver bullion content by weight. Roughly speaking, at the moment, pre-1920 shillings will change hands for something upwards of £2 per shilling, based around the silver spot market price. As you will immediately see, this is somewhat more than the 5p face value they used to change hands for, which reflects the massive amount of inflation that has taken place over the time period.

Between 1920 and 1946, the coins were instead minted from an alloy containing only 50% silver. This was how a nearly 50% devaluation of the Pound was effected by politicians back in the day. In fact, debasing currency in this way by reducing the silver content goes way back, to well before the Romans; it's really nothing new for politicians to use the expedient of devaluing a nations currency in order to cover up their past economic mismanagement. The reason it was necessary to devalue the Pound in 1920? World War I had cleaned us out and this was the only way we could ever repay our debts. Everyone in the country took an almost 50% real-terms pay cut overnight, because the currency they were being paid in was worth just over half what it had been until that time. This was the beginning of the end of the mighty British Empire, the first empire that the sun never set on. The first truly global dominant power.

From 1947, UK coins were changed to 0% silver content - they were entirely made from an alloy of copper and nickel, called cupronickel. This was necessary as a result of the massive public spending during World War II, which essentially left our once-powerful nation completely bankrupt. The only way we could pay our bills to foreign creditors, was to do it with money that was virtually worthless like this. It was a default on our debts, through the political expedient of making the money intrinsicly worth almost nothing. The creditors still got piles of lovely shiney shillings and crowns, but they no longer contained any silver. All of which goes to prove the sage advice in the old adage never a borrower, or lender, be!

Similar to the "pre 1920" coins, you will find many people on eBay trading the "pre 1947" coins with each other, again based on the weight at 50% silver (no value is attributed to the remainder of metal making up the alloy). As you might expect, they change hands for about half the price of the "pre 1920" coins, because they have about half the silver content. You will not be too surprised, I'm sure, to know there is no such market for "post 1947" cupronickel coins.

Anyway, the reason (finally! :-) ) for this post is that today I read with interest the Royal Mint will soon be even removing the copper from our wonderful British coins, making our coins instead from steel covered in nickel.

How wonderful -- our currency is no longer as good as copper, let alone as good as gold. I wonder how many more years before they have to replace the steel with something a little cheaper...

You can read for yourself the BBC article on this subject, if you like. Here

Wednesday 20 October 2010

The Telegraph are again quoting Mervyn King, Bank or England Governor, today. here He gave the last decade its moniker of "NICE", and now he has allocated a new one for this decade -- "SOBER". (I won't expand what these stand for, if you're interested it's all in the linked article.)

I figure on this the day that George Osborne will unveil later his "draconian budget cuts", I ought to step up and remind everyone that these cuts that will be announced, will not cut the national debt. No, that will continue to increase. The cuts will not even be sufficient to get rid of the budget deficit, we will still be spending more on public services expenditure each year than the government will collect in taxes.

The missing cash to pay the bills? Well, we'll just have to continue to print the missing money to pay those bills won't we (aka "Quantitative Easing"). I wonder who, if anyone, will buy all the UK government gilt bonds that will need to be issued to buy this money from the Bank of England when it is printed up? I wonder if buyers will show up in sufficient quantity that prices will remain bid up to the sky, and interest rates will accordingly remain this ridiculously low.

The most-read post on this blog -- still picked up several times a week via Google searches, mostly by people at financial institutions going on their IP addresses -- is one referring to Stuart Cheek of BGC Partners, back in May 2009 (here). The question remains unanswered, what will happen to the UK economy if we were to lose our AAA credit rating? But I wonder how much longer can pass before we find out... George better really take the UK's breath away with the cuts later today, or UK gilts and the Pound will likely take a beating from international investors.

Monday 4 October 2010

Still a modern-day Glass-Steagall is recommended, and still it isn't happening

Today I read via the BBC that another think tank, the New Economics Foundation, have analysed the banking system once more and they still find it is in serious peril, even after all the lovely lolly, in the form of the various bail-outs and back-stops that were handed out like sweets to anyone [with a banking license] who wanted them, using your money. And your kids' money that will be recovered from them in the years to come as the longer-dated government bonds come to maturity. After all, never forget it's all our money the government spends; it doesn't have any of its own. Every year there is a goverment budget deficit, that's another future year of higher taxes and lower public service spending that has been extorted from you, regardless of whether you consent to it - they can spend all they want, but one way or another it all eventually has to be repaid, by taxpayers, to the people who lent it.

Once again, the only sustainable cure proposed is the equivalent of a modern-day Glass-Steagall act -- as per the laws instituted after the Great Depression, the last time a credit crisis of this kind occurred. Now, it's a shame Mervyn King [the governor of the Bank of England] was not actually running the country's finances all these years as you might think he has been, because my first post mentioning that a new Glass-Steagall was the necessary cure to prevent it happening all over again, back on the 21st October 2009 (here), recorded Mervyn was the first person from the halls of UK financial power to appear in the mainstream media mentioning this was the solution to the problems that had occurred.

Still, all this time later, it has not been put in place and there is no indication that it will be agreed to. It HAS been discussed, but is resisted by the bankers and their lobbies at parliament because it will destroy their profit-making machine. We are heading straight into further credit strain, and nothing has been done to avert disaster.

Click here to read the article about the New Economics Foundation findings, on the BBC website.

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